Inventory is down. Prices are coming back up. And as a result, the “ugly appraisal issue” is rearing its head. Sometimes what you get is a roll of the dice!
Most contracts on homes in Northern Virginia contain an appraisal contingency. In other words, the contract is contingent upon the home appraising for a certain value, often the sales price. However, appraisers hired by lenders are held to very specific standards. For example, they must use 3 settled comparables (meaning 3 homes that have sold and gone to closing). They can add a 4th comp that is under contract and even one that is just listed & not sold yet. However, the value is mainly derived from the settled comps.
So when we are in a rising market, as we have been for about a year in our area, appraised values often lag true market values; and we see appraisals coming in low.
Earlier this month, a home in Vienna received 11 contracts. It has not settled, so we are not sure of the final price, but it’s very likely it sold well over list price. If the winning contract contained an appraisal contingency (and it may not due to the competition involved), the appraiser may have a big challenge supporting the value. In this case, when so many people are bidding up a property, it’s unlikely the sold comps will support it. (This is where we see market value not matching appraised value. And the reverse can happen in a declining market.) It will take time for sales to happen that are cash purchases or for buyers with large down payments. Once these happen, appraised values can start rising again.
So what happens? Does this mean your home sale or purchase is automatically derailed?
The short answer is – it might or it might not. (About 18 months ago, The National Association of Realtors reported that one in five contracts was canceled because of “appraisal issues”.)
In one case we had, the appraisal came in over $100,000 below the agreed upon sales price in the contract. Since the contract was contingent upon a satisfactory appraisal, the purchasers had the option of voiding the contract. The Buyers & Sellers tried to come to an agreement to lower the price, but could not reach an accord. And the contract fell apart. The home went back on the market.
What was interesting to note about this case (and very frustrating to all concerned!) is that the appraiser was not familiar with our area. Not only did he live in another state, but he was so unfamiliar with Vienna (where the property was) that he got lost on the way to the home to do the appraisal and had to spend 20 minutes on the phone with our office directing him to the property. (Note that this home is EASY to find and in a sought after, popular area.)
Unfortunately, this is not an unusual occurrence. While many appraisers are professional, full-time, local experts (just like many Realtors are), some are not. And based on various lending requirements and other regulatory legislation, there is very little control able to be exercised by Realtors, Sellers, Buyers and even Lenders on the selection of which appraiser to use.
Another common occurrence in situations like ours is that when the appraiser is not familiar with the area, and has not been in other similar homes in the neighborhood, he/she often relies strictly on tax records and MLS information. And while that information is important, it is sometime lacking in critical detail. For example, the MLS or tax record may leave out an important “detail” like the fact that the home backs to power lines. This “little detail” has HUGE impact on what Buyers are willing to pay and should be adjusted for when doing a valuation of the home. What we see happen sometimes is that a home is undervalued because an appraiser uses a home like the one backing to power lines as a comp (comparable), but does not adjust the value of the subject property (the one he is trying to set a value for) upward since that home does not back to power lines. How could he if he doesn’t know?
We had another situation where the appraisal came in below sales price. In this case, the buyer was making a significant down payment (more than the minimum required by the lender), so the buyer had the option of voiding the contract, re-negotiating the sales price with the Seller or proceeding to settlement despite the low appraisal. The buyer was a local buyer, one who had already been living in the general vicinity of the home and who knew the value of the neighborhood and the “intangibles” that an appraiser may not recognize or be able to adjust for based on lending guidelines. So the Buyer chose to proceed to settlement at the original sales price, despite the low appraisal.
There are all sorts of different scenarios that may play out when an appraisal comes in low. These were just two examples. One conclusion we have made is that the experience of the Realtors on both sides of a transaction has direct influence on what happens (just as the experience of the appraiser affects the outcome). If you are buying or selling a home – a low appraisal is just one of the possible “challenges” you may face. You need a Realtor who can not only fill out forms & “pull comps” for you, but who can discuss re-sale issues you may not have thought of, who can resolve financing issues you may not be aware of and who has vast resources to draw upon.
In another of our low appraisal situations, we had a Buyer and a Seller who both really wanted the sale to go through – despite the low appraisal. The Seller could not afford to lower the price. And the Buyer did not have additional money for a down payment, but felt the value was there, planned to be in the home for the long-term and really wanted the house, even though it appraised for less than sales price. In this case we were representing the Seller. A nice, hard-working, but less experienced agent was representing the Buyer. This agent was not able to help her Buyer find a way to get financing. Since our team has been working in the local market since 1973, we have a vast array of contacts & resources that we can call upon in difficult situations. We were able to connect the Buyer with one of our top lenders. The lender had a special program requiring less down payment and was also able to obtain a more accurate appraisal. And this sale went through. Happy Buyer and Happy Seller.
Each situation is different. Can the appraisal be disputed by the Realtor providing better comps – comps that fit the lender’s requirements? Can a new lender be brought into the picture? Does the Buyer even want to proceed if the appraisal is low? Can a new sales price be negotiated that both parties agree upon? Would a different loan program work? Can the Buyer make a larger down payment so that the lender will proceed with a low appraisal? Is there a relocation company involved and does this affect a buy-back or reimbursement? Would it be better for the Buyer not to proceed? These and many more questions are the types of things your Realtor should walk you through!
If youre thinking of buying or selling a home, Contact The Belt Team at (703) 242-3975 for a more in-depth discussion & analysis We’ll be happy to schedule a consultation and get very detailed about the homebuying or homeselling process so that you can make the decision that is best for YOU! Don’t you deserve the best real estate agents in Northern VA?